Rare Opportunity

Hybrid cars can't run without them. But China has a stranglehold on the exotic minerals called rare earths. Three Australian mining outfits are racing to plug the supply gap

Spurred by high oil prices and marketed as good for the environment, hybrid cars are racking up big sales. But hybrids, which run on a combination of liquid fuel and electricity, depend on a group of exotic minerals known as rare earths. Supplies of rare earths are tight, and unless production is ratcheted up, the brakes could be applied to the hybrid revolution.

The problem for hybridmakers is that China accounts for 92% of the world's rare earths supply and in 2005 the government started quietly curtailing exports. From shipments of 48,500 tons in 2004, China's Ministry of Commerce has cut its export quotas by a half-percent in 2005, 7% in 2006, 3% last year and 6% this year, according to government statements obtained by forbes asia. The result is that today the quota is down to 41,000 tons at a time of quickly rising demand.

Now there are signs that China is putting a tighter lid on shipments of rare earths. "Some of the Chinese companies that had signed contracts starting July 1 have suddenly reneged, saying that if you want the stuff you're going to have to pay 10% or 20% more," says Ian Chalmers, chief executive of Alkane Resources, a Perth miner. Says Dudley Kingsnorth, chairman of consultancy
Industrial Minerals
Co. of Australia: "What you're seeing is the Chinese making the most of their current monopoly position."

But at least some of what China is doing seems to be typical developing-country industrial policy. "China's aim has been to encourage value-adding processes to take place within China," said Perth mining company Arafura in a July filing with the Australian Securities Exchange. "They now export more rare earths in the form of downstream products such as magnets and phosphors than as rare earth oxide."

Some rare earths--with tongue-twisting names such as neodymium, praseodymium and dysprosium--are essential ingredients in the electric motors, magnets and batteries used in hybrids, as well as laptop computers, cell phones and MP3 players. If supplies keep getting tighter, some manufacturers might have to trim their production targets within a few years. "The limited availability of rare earths for the batteries is likely to limit supply," says Kingsnorth. "Carmakers are major users, but so too is the oil-refining industry, which needs certain rare earths as catalysts."

The biggest hybridmaker,
Toyota
, which says annual sales might top 1 million as soon as 2010, isn't commenting. But Kingsnorth says, "I am confident that Toyota has adequate contracted supplies of the rare earth batteries to meet demand for two to three years."
Nissan
says it's "been informed by our suppliers that we have enough supply for a limited period" and adds that it "continues to monitor the supply and demand in anticipation of future market shifts that may impact our operations." Win Maw Soe, a director of PI R&D, a Yokohama company conducting research on hybrid batteries and engines, says: "The Chinese will not go too far with export controls because many Chinese companies rely on Japanese components, and any shortage because of a lack of rare earth elements would hurt them, too."

All this has car and electronics makers hunting for fresh sources of supply. Australia doesn't have a rare earths mine yet, but three companies are close to entering the game--Alkane, Arafura and Sydney outfit Lynas. "We're getting a steady stream of inquiries, mainly from Asian carmakers," says Alkane's Chalmers. His company is developing one of the world's biggest rare earths mines, near Dubbo in New South Wales. The mine, which won't go online for at least three years, will also produce a mix of other minerals, including niobium (used in the steel industry), zirconium (chemicals and nuclear power to clad fuel rods) and possibly uranium. "It's being driven by concerns about future supply but also a fear of China's stranglehold on the industry, which has scared the hell out of rare earths buyers," he says. Oddly, unless state laws banning uranium mining in New South Wales are changed, any uranium extracted at Dubbo will be buried in dumps.

Demand for rare earths is expected to reach 188,000 tons by 2012, up from 108,000 tons now, says Lynas Chief Executive Nicholas Curtis. "China's contribution to supply is expected to remain static at 100,000 tons (most of this China uses itself), which means that even with 21,000 tons from our Mount Weld mine in Western Australia and from other sources, we see a shortfall of close to 50,000 tons a year in 2012. That's why I've invested in the industry."

Alkane's Chalmers agrees. "Projections very clearly show that rare earths output is not going to meet demand over the next five years," he says. "And that's even bringing on Mount Weld, the Mountain Pass mine in California (a
Chevron
project) and mines such as Dubbo, Arafura and some in Canada."

So not surprisingly, prices are up sharply. Lynas estimates that the value of the mix of minerals it's started to mine has risen from $4 a kilogram five years ago to $15.25 at the end of July, with that latest price an 11% increase from the first three months of 2008. Makers of hybrid cars have no choice but to pay the higher prices because substitution is out of the question. "Let's say it's elementally impossible," says Curtis. "Neodymium and praseodymium make the best magnets, and magnets are an essential component of all electric motors."

Kingsnorth, the consultancy chairman, says a hybrid car needs a range of rare earths for its electric motor, generator and long-life battery, as well as an estimated 25 smaller electric motors throughout the vehicle to perform functions such as raising and lowering the windows. Other rare earths such as cerium, yttrium and europium are used in liquid crystal display screens and in polishing glass.

Of the three Australian producers now developing mines, Lynas is the most advanced. The mining and early-stage processing will take place in Australia, and the separation of the rare earths into individual products will take place in Quantan on the East Malaysia coast. The first mining at Mount Weld has already taken place, with 773,300 tons of ore stockpiled and ready for export to Malaysia, where construction has started on the plant.

Intrepid investors can play the rare earths market. The three Australian rare earths outfits--which all started as gold miners but currently are not producing any output--are listed on the Australian exchange, and all have fallen sharply in the recent commodity-price correction. Arafura is down from a 12-month high of $1.71, to 64 cents. Alkane has fallen from 45 cents to 29 cents, and Lynas is down from $1.45 to 93 cents.